Keep Your Chips on Lam Research

04/07/2020 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

At first blush, Lam Research (LRCX) doesn’t sound like a good pick in a market worried about how the coronavirus will disrupt semiconductor- related supply chains in Asia, explains growth and income specialist Richard Moroney, editor of Dow Theory Forecasts.

However, we see impressive long-term growth and a reasonable valuation in this market leader. Lam, with annual revenue north of $9.5 billion, controls about one-third of the global market for wafer-fabrication equipment.

On March 17, Lam rescinded its March-quarter guidance, citing closures of U.S. and foreign facilities in connection with the coronavirus.

But the company did not back away from the long-term growth model it presented earlier this month, targeting annualized growth of 8% to 10% in sales and 16% to 17% in profits, assuming global spending growth of 5% annually on semiconductor equipment.

Both the sales and profit targets came in above consensus expectations. Lam sees the increasing complexity of semiconductors driving demand for new etching and deposition techniques.

Those are areas where Lam has been increasing market share for years, demonstrating an ability to upgrade its product lineup in advance of technological inflection points.

The company also says it plans to return 75% to 100% of free cash flow to investors over the next five years, up from a prior target of more than 50%. Lam has reduced its share count 18% over the last three years, and aggressive buybacks should continue.

Also implied in the new guidance is the potential for massive dividend growth, though the company did not promise such a move. Lam’s dividend has more than tripled over the last three years; the stock yields 2.0%.

At 16 times trailing earnings, Lam trades 12% below its industry median and 3% below its own three-year average. Lam also trades at a discount based on price/operating cash flow and enterprise value/EBITDA.

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